[1]In order to succeed in this appeal, the appellant Her Majesty the Queen must persuade us that one transaction in the series of transactions in issue is an avoidance transaction, and that the tax benefit achieved by the respondent MIL (Investments) S.A. is an abuse or misuse of the object and purpose of article 13(4) of the Convention between Canada and the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of fiscal Evasion with respect to Taxes on Income and on Capital (the Tax Treaty).

[2]The Tax Court judge found that the series of transactions consisted of the respondent’s sale of 703,000 shares of Diamond Fields Resources Ltd. (DFR), the payment of the Final Dividend (as described in the Tax Court judge’s reasons) and the continuance of the respondent as a Luxembourg corporation. The Tax Court judge found that the respondent’s August 1996 sale of its remaining shares in DFR was not part of the series because “at the end of the series of transactions, DFR management, including co-chairman Boulle (the directing mind of the respondent) and therefore the appellant [respondent in the appeal] had no intention of selling”: Reasons for Decision, at para. 67.

[3]The appellant’s task has been made easier by the respondent’s admission that its continuance as a Luxembourg corporation was an avoidance transaction. As a result, and even though the Tax Court judge found that the respondent’s August 1996 sale of its shares in DFR was not, in and of itself, an avoidance transaction, the tax benefit which the respondent ultimately obtained following that sale may be subject to the General Anti-Avoidance Rule (GAAR) if the sale was part of the series of transactions or was undertaken in contemplation of the series of transactions.

[4]Counsel for the appellant and counsel for the respondent, each in their turn, took us to the evidence in support of their position. The fact that there is evidence in support of each side’s position makes it unlikely that the Tax Court judge’s conclusion was the result of a palpable and overriding error.

[5]We do not have to answer that question as we are of the view that the appeal would fail in any event as we are unable to see in the specific provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act) and the Tax Treaty to which we were referred, interpreted purposively and contextually, any support for the argument that the tax benefit obtained by the respondent was an abuse or misuse of the object and purpose of any of those dispositions.

[6]It is clear that the Act intends to exempt non-residents from taxation on the gains from the disposition of treat exempt property. It is also clear that under the terms of the Tax Treaty, the respondent’s stake in DFR was treaty exempt property. The appellant urged us to look behind this textual compliance with the relevant provisions to find an object or purpose whose abuse would justify our departure from the plain words of the disposition. We are unable to find such an object or purpose.

[7]If the object of the exempting provision was to be limited to portfolio investments, or to non-controlling interests in immoveable property (as defined in the Tax Treaty), as the appellant argues, it would have been easy enough to say so. Beyond that, and more importantly, the appellant was unable to explain how the fact that the respondent or Mr. Boulle had or retained influence of control over DFR, if indeed they did, was in itself a reason to subject the gain from the sale of the shares to Canadian taxation rather than taxation in Luxembourg.

[8]To the extent that the appellant argues that the Tax Treaty should not be interpreted so as to permit double non-taxation, the issue raised by GAAR is the incidence of Canadian taxation, not the foregoing of revenues by the Luxembourg fiscal authorities.

In March 1993 an individual ("Boulle") transferred his shares of a Canadian public junior exploration company ("DFR") to the taxpayer, which was a newly-incorporated Cayman Islands company wholly owned by him. By June 1995, the taxpayer exchanged, on a rollover basis pursuant to s. 85.1, a portion of its DFR shares (which had substantially appreciated) for common shares of a large Canadian public company ("Inco"), with the result that the taxpayer's shareholding in DFR was reduced below 10%. This result positioned the taxpayer to clearly fit within an exemption from Canadian capital gains tax under Article XIII of the Canada-Luxembourg Income Tax Convention (the "Treaty") on a subsequent disposition of that block of shares once the taxpayer became resident in Luxembourg. In July 1995, the taxpayer was continued into Luxembourg, in August 1995 the taxpayer sold its shares of Inco and in August 1996 it sold its DFR shares to Inco.

In rejecting the submission of counsel for the Crown that the claiming of exemption under the Treaty on the August 1996 sale represented an abuse or misuse, Pelletier, JA stated (at para. 6-7):

"It is clear that the Act intends to exempt non-residents from taxation on the gains from the disposition of treaty exempt property. It is also clear that under the terms of the Tax Treaty, the respondent's stake in DFR was treaty exempt property. The appellant urged us to look behind this textual compliance with the relevant provisions to find an object or purpose whose abuse would justify our departure from the plain words of the disposition. We are unable to find such an object or purpose.

If the object of the exempting provisions was to be limited to portfolio investments, or to non-controlling interests in immoveable property (as defined in the Tax Treaty [including real estate company shares]), as the appellant argues, it would have been easy enough to say so. Beyond that, and more importantly, the appellant was unable to explain how the fact that the respondent or Mr. Boulle had or retained influence or control over DFR, if indeed they did, was in itself a reason to subject the gain from the sale of the shares to Canadian taxation rather than taxation in Luxembourg."

The Court also summarily dismissed an argument that the Treaty should not be interpreted so as to permit "double non-taxation", i.e., a result where there was no income tax under the laws of either jurisdiction.

Disclaimer

None of the content is or should be construed as advice, and readers should obtain any tax (or other) advice from their professional advisors. We disclaim any liability to anyone arising from reliance on any content of this or any other site.